Forest Service: Barriers to and Opportunities for Generating Revenue
(Testimony, 02/10/99, GAO/T-RCED-99-81).

Pursuant to a congressional request, GAO discussed the barriers and
opportunities for generating revenue on lands managed by the Forest
Service.

GAO noted that: (1) legislative and administrative decisions and
judicial interpretations of statutory requirements have required the
agency to shift its emphasis from uses that generate revenue, such as
producing timber, to those that do not, such as protecting species and
their habitats; (2) the Forest Service is required by law to continue
providing certain goods and services at less than fair market value; (3)
certain legislative provisions also serve as disincentives to either
increasing revenue or decreasing costs; (4) because the costs are funded
from annual appropriations rather than from the revenue generated, the
agency does not have an incentive to control costs; (5) when Congress
has provided the Forest Service with the authority to obtain fair market
value for certain uses, or to recover costs for services, the agency
often has not done so; (6) as a result, the Forest Service forgoes at
least +$50 million in revenue annually; (7) given a financial incentive
and flexibility, the Forest Service can and will increase revenue; (8)
for example, the recreational fee demonstration program, first
authorized by Congress in fiscal year (FY) 1996, allows the agency to:
(a) test new or increased fees at up to 100 sites; and (b) retain the
revenue to help address unmet needs for visitor services, repairs and
maintenance, and resource management; (9) by allowing the agency to
retain the fees collected, Congress created an incentive for forest
managers to emphasize fee collections; (10) gross revenue from
recreational fees on the national forests increased from $10.0 million
in FY 1996 to $26.3 million in FY 1998; (11) the administration plans to
forward legislative proposals to Congress, and the Forest Service is
considering other legislative changes, that would allow the agency to
collect, retain, and spend more fee revenue; (12) however, allowing
forest managers to retain and spend all or a portion of the revenue they
collect would involve risks and difficult trade-offs; (13) in
particular, the Forest Service is still far from achieving financial and
performance accountability and thus cannot accurately account for how it
spends money and what it accomplishes with it; and (14) allowing the
agency to collect, retain, and spend more of the revenue generated by
goods and services on the national forests would also require difficult
trade-offs or policy choices between increasing revenue and other values
and concerns.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-99-81
     TITLE:  Forest Service: Barriers to and Opportunities for 
             Generating Revenue
      DATE:  02/10/99
   SUBJECT:  Proposed legislation
             Forest management
             National forests
             Financial management
             Fair market value
             Profits
             User fees

             
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Cover
================================================================ COVER


Before the Subcommittee on Interior and Related Agencies, Committee
on Appropriations, House of Representatives

For Release
on Delivery
Expected at
10 a.m.  EST
Wednesday
February 10, 1999

FOREST SERVICE - BARRIERS TO AND
OPPORTUNITIES FOR GENERATING
REVENUE

Statement of Barry T.  Hill, Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-99-81

GAO/RCED-99-81T


(141274)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are here today to discuss barriers to and opportunities for
generating revenue on lands managed by the Department of
Agriculture's Forest Service.  Our comments are based primarily on
two reports that we issued within the last year that address this
issue.\1 In summary, we have found the following: 

  -- Generating revenue is not a mission priority for the Forest
     Service.  Increasingly, legislative and administrative decisions
     and judicial interpretations of statutory requirements have
     required the agency to shift its emphasis from uses that
     generate revenue, such as producing timber, to those that do
     not, such as protecting species and their habitats. 
     Furthermore, the Forest Service is required by law to continue
     providing certain goods and services at less than fair market
     value.  Among these are most recreation sites that the agency
     manages directly, hardrock minerals, and livestock grazing. 
     Certain legislative provisions also serve as disincentives to
     either increasing revenue or decreasing costs.  For example, the
     agency is sometimes allowed to retain and spend a portion of the
     revenue it generates without deducting its costs.  Because the
     costs are funded from annual appropriations rather than from the
     revenue generated, the agency does not have an incentive to
     control costs.  Moreover, when the Congress has provided the
     Forest Service with the authority to obtain fair market value
     for certain uses, such as timber, resort lodges, private
     recreational cabins, and oil and gas pipelines, or to recover
     costs for services, such as reviewing and processing special-use
     permit applications, the agency often has not done so.  As a
     result, the Forest Service forgoes at least $50 million in
     revenue annually. 

  -- Given a financial incentive and the flexibility to explore
     innovative entrepreneurial ideas and more businesslike
     practices, the Forest Service can and will increase revenue. 
     For example, the recreational fee demonstration program, first
     authorized by the Congress in fiscal year 1996, allows the
     agency to (1) test new or increased fees at up to 100 sites and
     (2) retain the revenue to help address unmet needs for visitor
     services, repairs and maintenance, and resource management.  By
     allowing the agency to retain the fees collected, the Congress
     created an incentive for forest managers to emphasize fee
     collections.  Gross revenue from recreational fees on the
     national forests increased from $10.0 million in fiscal year
     1996ï¿½the last year before the demonstration program was
     implementedï¿½to $26.3 million in fiscal year 1998, an increase of
     163 percent. 

  -- The administration plans to forward legislative proposals to the
     Congress, and the Forest Service is considering other
     legislative changes, that would allow the agency to collect,
     retain, and spend more fee revenue.  However, allowing forest
     managers to retain and spend all or a portion of the revenue
     they collect would involve risks and difficult trade-offs.  In
     particular, the Forest Service is still far from achieving
     financial and performance accountability and thus cannot
     accurately account for how it spends money and what it
     accomplishes with it.  Allowing the agency to collect, retain,
     and spend more of the revenue generated by goods and services on
     the national forests would also require difficult trade-offs or
     policy choices between increasing revenue and other values and
     concerns, such as providing free access to public lands,
     promoting the economic stability of historic commodity uses, and
     setting aside additional lands for resource protection and
     conservation. 


--------------------
\1 Forest Service:  Barriers to Generating Revenue or Reducing Costs
(GAO/RCED-98-58, Feb.  13, 1998) and Recreation Fees:  Demonstration
Fee Program Successful in Raising Revenues but Could Be Improved
(GAO/RCED-99-7, Nov.  20, 1998). 


   THE FOREST SERVICE LACKS CLEAR
   REVENUE-GENERATING PRIORITIES
   AND FLEXIBILITY
---------------------------------------------------------- Chapter 0:1

The low priority assigned to increasing revenue results, in part,
from the importance or emphasis given to other values and concerns,
especially protecting resources and providing goods and services. 
Language in federal statutes implies that maximizing revenue should
not be the overriding criterion in managing national forests. 
Moreover, increasingly, legislative and administrative decisions and
judicial interpretations have required the Forest Service to give
priority to non-revenue-generating uses over uses that can and have
produced revenue.  For example, the Endangered Species Act and other
environmental and planning laws and their judicial interpretations
limit the agency's ability to generate revenue, requiring instead
that priority be given to protecting species' diversity and other
natural resources, including clean water and clean air.  In addition,
both the Congress and the administration have increasingly set aside
National Forest System lands for conservationï¿½as wilderness, wild and
scenic rivers, national monuments, and recreational areas.  Only
limited revenue-generating uses, such as timber sales and oil and gas
leasing, are allowed in some of these areas. 

When the Forest Service can generate revenue, it is sometimes
required to provide goods and services at less than their fair market
value.  For instance, the fee system for ski areas on national
forests, developed by the ski industry and enacted into law in 1996,
does not ensure that fees collected from ski areas reflect fair
market value.  Other legislative decisions not to charge fees for the
use of most recreational sites and areas managed directly by the
agency reflect a long-standing philosophy of free access to public
lands.  In addition, federal statutes and regulations have narrowly
defined the instances in which the Forest Service can charge fees for
noncommercial recreational activities, such as hunting and fishing by
individuals on national forests, and the agency generally defers to
state laws regulating these activities.  As a result, forest managers
do not charge individuals for hunting and fishing on their lands. 

Other legislative requirements that limit the generation of revenue
from activities such as hardrock mining and livestock grazing reflect
a desire to promote the economic stability of certain historic
commodity uses.  For example, the Mining Law of 1872 was enacted to
promote the exploration and development of domestic mineral resources
as well as the settlement of the western United States.  Under the
act's provisions, the federal government receives no financial
compensation for hardrock minerals, such as gold and silver,
extracted from Forest Service and other federal lands.  In contrast,
the 11 western states that lease state-owned lands for mining
purposes impose a royalty on minerals extracted from those lands. 
Similarly, the formula that the Forest Service uses to charge for
grazing livestock on its lands keeps fees low to promote the economic
stability of western livestock grazing operators with federal
permits. 

In addition, revenue-retention and revenue-sharing provisions
discourage efforts to control costs.  For example, legislation allows
the Forest Service to retain a portion of the revenue it generates
from timber sales and requires the agency to share a portion of that
revenue with states and counties, without deducting its costs.  The
costs to prepare and administer the sales are funded primarily from
annual appropriations rather than from the revenue generated by the
sales.  As a result, neither the agency nor the states and counties
have an incentive to control costs, and the Forest Service may be
encouraged to sell timber at prices that would not always allow it to
recover its costs.  From fiscal year 1992 through fiscal year 1997,
the Forest Service spent about $2.5 billion in appropriated funds and
other moneys to prepare and administer timber sales but returned less
than $600 million in timber sale revenue to the General Fund of the
U.S.  Treasury.\2

When the Congress has given the Forest Service the authority to
obtain fair market value for goods or to recover costs for services,
the agency often has not done so.  As a result, forgone revenue has
cost taxpayers hundreds of millions of dollars, as the following
examples from our prior work show. 

  -- In June 1997, we reported that the sealed bid auction method is
     significantly and positively related to higher bid premiums on
     timber sales.  However, the Forest Service used oral bids at
     single-bidder sales rather than sealed bids, resulting in an
     estimated decrease in timber sale receipts of $56 million from
     fiscal year 1992 through fiscal year 1996. 

  -- In December 1996, we reported that, in many instances, the
     Forest Service has not obtained fair market fees for commercial
     activities on the national forests, including resort lodges,
     marinas, and guide services, or for special noncommercial uses,
     such as private recreational cabins and special group events. 
     Fees for such activities are the second largest generator of
     revenue for the agency, after timber sales.  The Forest
     Service's fee system, which sets fees for most commercial uses
     other than ski operations, has not been updated for nearly 30
     years and generally limits fees to less than 3 percent of a
     permittee's gross revenue.  In comparison, fees for similar
     commercial uses of nearby state-held lands averaged 5 to 15
     percent of a permittee's total revenue. 

  -- In December 1996, we also reported that although the Forest
     Service has been authorized to recover the costs incurred in
     reviewing and processing all types of special-use permit
     applications since as far back as 1952,\3 it has not done so. 
     On the basis of information provided by the agency, we estimated
     that in 1994 the costs to review and process special-use permits
     were about $13 million. 

  -- In April 1996, we reported that the Forest Service's fees for
     rights-of-way for oil and gas pipelines, power lines, and
     communication lines frequently did not reflect fair market
     value.  Agency officials estimated that in many
     casesï¿½particularly in high-value areas near major citiesï¿½the
     Forest Service may have been charging as little as 10 percent of
     the fair market value. 


--------------------
\2 Forest Service:  Distribution of Timber Sales Receipts, Fiscal
Years 1992-94 (GAO/RCED-95-237FS, Sept.  8, 1995) and Forest Service: 
Distribution of Timber Sales Receipts, Fiscal Years 1995 Through 1997
(GAO/RCED-99-24, Nov.  12, 1998). 

\3 Title V of the Independent Offices Appropriation Act of 1952, as
amended (31 U.S.C.  9701). 


   GIVEN A FINANCIAL INCENTIVE,
   THE FOREST SERVICE CAN AND WILL
   INCREASE REVENUE
---------------------------------------------------------- Chapter 0:2

The Forest Service's failure to obtain fair market value for goods or
recover costs for services when authorized by the Congress results,
in part, because the agency lacks a financial incentive to do so. 
One incentive would be to allow the agency to retain and spend the
revenue generated to address its unmet needs. 

For example, from the end of World War II through the late 1980s, the
Forest Service emphasized timber production on national forests, in
part, because a substantial portion of the receipts from timber sales
are distributed into a number of funds and accounts that the agency
uses to finance various activities on a sale area.  Even now, many
forest managers have the opportunity to increase their budgets by
increasing timber sales. 

Conversely, before fiscal year 1996, the Land and Water Conservation
Act of 1965, as amended, required that revenue raised through
collections of recreational fees be deposited in a special U.S. 
Treasury account.  The funds in this account could become available
only through congressional appropriations and were generally treated
as a part of, rather than a supplement to, the Forest Service's
regular appropriations. 

However, in fiscal year 1996, the Congress authorized the fee
demonstration program to test recreational fees as a source of
additional financial resources for the Forest Service and three other
federal land management agencies.  The demonstration program
legislation allows these agencies to experiment with new or increased
fees at up to 100 sites per agency.  The Congress directed that at
least 80 percent of the revenue collected under the program be spent
at the unit collecting the fees.  The remaining 20 percent can be
spent at the discretion of each agency.  In essence, the more revenue
that a national forest can generate through new or increased fees,
the more it will have to spend on improving conditions on the forest. 

By allowing the agency to retain the fees collected, the Congress
created a powerful incentive for forest managers to emphasize fee
collections.  Gross revenue from recreational fees on the national
forests increased from $10.0 million in fiscal year 1996 to $18.3
million in fiscal year 1997, or by 83 percent, and to $26.3 million
in fiscal year 1998, or by 163 percent compared with fiscal year
1996.  Five sites each generated over $1 million in fiscal year 1998
compared with only two sites in fiscal year 1997.  Two sitesï¿½the
Mount St.  Helens National Volcanic Monument on the Gifford Pinchot
National Forest in Washington State and the Enterprise Forest Project
in Southern Californiaï¿½each generated over $2.3 million in fiscal
year 1998. 

The legislation also provided an opportunity for the four federal
land management agencies to be creative and innovative in developing
and testing fees by giving them the flexibility to develop a wide
range of fee proposals.  As a result, the Forest Service has, among
other things, developed new methods for collecting fees and has
experimented with more businesslike practices, such as peak-period
pricing.  These practices can help address visitors' and resource
management needs and can lower operating costs. 


   OBSERVATIONS ON THE NEED FOR
   LEGISLATIVE AND OTHER CHANGES
---------------------------------------------------------- Chapter 0:3

According to Forest Service officials, the agency is evaluating
whether to issue regulations that would allow forest managers to
charge fees to recover their costs to review and process special-use
permit applications.  The administration also plans to forward
legislative proposals to the Congress in the near future that would
allow the agency to retain and spend all of the revenue generated by
fees for commercial filming and photography on the national forests. 
Other legislative changes being considered by the agency would allow
it to retain and spend all or a portion of the (1) revenue generated
by fees charged to recover the costs to review and process
special-use permit applications and (2) fees collected for resort
lodges, marinas, guide services, private recreational cabins, special
group events, and other commercial and noncommercial activities on
the national forests. 

On the basis of our work, we offer the following observations on the
Forest Service's ongoing efforts to secure alternative sources of
revenue.  First, sustained oversight by the Congress will be needed
to ensure that the agency maximizes revenue under existing
legislative authorities.  For instance, according to Forest Service
officials, the agency is evaluating whether to issue regulations to
allow forest managers to charge fees to recover their costs to review
and process special-use permit applications.  However, the agency has
been authorized by the Congress to recover these costs since 1952 and
has twice in the past 12 years developed, but not finalized, draft
regulations to implement the authority.  According to Forest Service
headquarters officials, both times, staff assigned to develop and
publish the regulations were reassigned to other higher-priority
tasks.  As a result, the agency estimates that it forgoes $5 million
to $7 million annually. 

Second, new legislation that would allow the Forest Service to retain
and spend more of the revenue generated by fees would provide forest
managers with additional incentive to emphasize fee collections. 
However, providing the agency with this authority at this time would
involve risks and difficult trade-offs.  In particular, the Forest
Service would not be able to accurately account for how it spent the
money and what it accomplished with it.  While the agency has made
progress in recent years, it is still far from achieving financial
accountability and possibly a decade or more away from being fully
accountable for its performance.\4 Because of its serious
long-standing financial management deficiencies and the problems it
has encountered in implementing its new accounting system, we
recently designated the Forest Service's financial management as a
high-risk area vulnerable to waste, fraud, abuse, and
mismanagement.\5

In addition, allowing the Forest Service to retain and spend revenue
that is generally treated as a part of, rather than an addition to,
its regular appropriations would be included under the limits on
discretionary spending imposed by the Budget Enforcement Act, as
amended.  Allowing the agency to retain fee revenueï¿½rather than
depositing the money in the General Fund of the Treasuryï¿½would also
reduce the Congress's ability to use these funds for other
priorities.  Furthermore, while this fee revenue may be initially
earmarked for the Forest Service, nothing would prevent the Congress
from using the revenue to offset, rather than supplement, the
agency's regular appropriations. 

Finally, new legislation being proposed or considered by the Forest
Service is limited to special-use fees and, as such, does not address
other potential sources of revenue.  For instance, in a July 1998
report, a team of Forest Service employees identified steps that the
agency should take to improve the way it conducts its business.\6

In addition to recreational and special-use fees, the team identified
the minerals and geology program and the relicensing of hydroelectric
sites on the national forests as the greatest opportunities for
securing alternative sources of revenue.  In addition, we have
reported that enacting legislation to impose a royalty on hardrock
minerals extracted from Forest Service and other federal lands could
generate hundreds of millions of dollars in increased revenue. 

However, allowing the Forest Service to collect, retain, and spend
more of the revenue generated by goods and services on the national
forests would require difficult policy choices and trade-offs.  For
example, collecting recreational fees conflicts with the
long-standing philosophy of free access to public lands.  Imposing a
royalty on hardrock minerals extracted from national forests
conflicts with the desire to promote the economic stability of this
historic commodity use.  And allowing forest managers to retain and
spend revenue from oil and gas leasing and production would give them
a strong financial incentive to lease lands that they might otherwise
set aside for resource protection or conservation.  Therefore, if the
Congress believes that increasing revenue from the sale or use of
natural resources should be a mission priority for the Forest
Service, it will need to work with the agency to identify legislative
and other changes that are needed to clarify and modify the
Congress's intent and expectations for revenue generation relative to
ecological, social, and other values and concerns. 


--------------------
\4 Major Management Challenges and Program Risks:  Department of
Agriculture (GAO/OCG-99-2, Jan.  1999) and Forest Service:  Lack of
Financial and Performance Accountability Has Resulted in Inefficiency
and Waste (GAO/T-RCED-98-135, Mar.  26, 1998). 

\5 High-Risk Series:  An Update (GAO/HR-99-1, Jan.  1999) and Major
Management Challenges and Program Risks:  Department of Agriculture
(GAO/OCG-99-2, Jan.  1999). 

\6 Project Ponderosa:  Report of the Business Action Team, Forest
Service (July 29, 1998). 


-------------------------------------------------------- Chapter 0:3.1

Mr.  Chairman, this concludes our prepared statement.  We will be
pleased to respond to any questions that you or Members of the
Subcommittee may have. 


*** End of document. ***